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Yellow vest protests bring uncertainty to French economic growth

Uncertainty over the future of the Yellow vest protest movement makes 2019 economic growth predictions difficult
Uncertainty over the future of the Yellow vest protest movement makes 2019 economic growth predictions difficult AFP/Alain Jocard

The French government introduced over 10 billion euros of tax cuts and minimum wage increases in December in reaction to anti-government ‘Yellow vest’ protests, but that failed to boost consumer spending, which dropped to nearly zero in the last quarter of 2018, adding to a downward trend of economic growth in France in 2018.


France’s economic growth slowed to 1.5 per cent in 2018, according to the Insee statistics office, which released figures on Wednesday. This was short of the government’s projection of 1.7 percent, and much lower than the year before when the economy grew the fastest in a decade, at 2.3 per cent.

Household consumption, a motor of French economic growth, decelerated over the year, growing at 0.8 per cent, compared to 1.1 per cent in 2017.

The slowdown was very stark in the last quarter, with growth slowing to nearly zero, despite French president Emmanuel Macron’s announcement of wage increases for the lowest paid workers and a tax cut for most pensioners.

Uncertainty leads to savings

Households preferred to save the extra income rather than spend it.

Mathieu Plane, economist, Ofce

“There was the crisis of the Yellow Vests and a lot of uncertainty, so even if purchasing power went up at the end of the year, it did not translate into an increase in consumption,” explains Mathieu Plane, of the Analysis and forecasting department of the French Economic Observatory at Sciences Po.

That extra money went into what he calls “precautionary savings”.

“Faced with these [protest] movements, households preferred to save the extra income rather than spend it,” he said, warning that this could have an even longer-term effect than the immediate drop in holiday spending due to shops being closed because of the protests.

The drop in consumer spending was offset by exports, which rose 3.1 per cent in 2018 (compared to 4.7 percent in 2017).

But Plane says that uncertainty about the future of the Yellow vest movement and the government’s reaction make projecting what will happen over the next year unclear.

What happens in 2019?

“There are elements that are favorable for increased income, consumption or even investment for the rest of 2019, but today we are faced with uncertainty, and uncertainty impacts precautionary savings,” says Plane.

“If households save more than they consume, that affects commercial activity. And for companies, uncertainty raises questions about investment and future projects.”

Business investment slowed sharply in the last quarter of 2018, to 0.3 per cent growth, compared to 1.7 per cent in the previous quarter, which Insee attributes to a drop in vehicle purchases.

And yet, tax cuts, wage increases and shifts in social charges should mean that both households and companies have more money.

Plane says the question is how this “will be re-injected in the economy, whether through consumption or investment.”

The government has projected 1.7 per cent growth this year, though the 2019 forecast is to be updated in April. The IMF estimates French growth of 1.5 percent this year.

France’s 2019 economic growth projections would put it ahead of Germany, which on Wednesday cut its 2019 growth forecast to 1.0 percent, down from a previous outlook last fall at 1.8 per cent.

Economy Minister Peter Altmaier said Brexit and trade conflicts, including import taxes imposed by the United States and China, explain the downward forecast.

“The headwinds, primarily from the external environment, are increasing,” he said.

Germany's economy grew 1.5 per cent in 2018, and 2.2 percent in 2017.

European Central Bank head Mario Draghi said earlier this month that risks for Europe's economy have "moved to the downside," leading to speculation the bank could postpone raising interest rates. The bank has said rates will stay at their current record low levels at least "through the summer."

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